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Healthcare Reform and You

New law brings changes in taxes, investing, annuities, and health savings accounts

President Obama signing healthcare reform law in 2010. (Photo: AP)

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With President Barack Obama's historic health reform legislation, the Health Care and Education Reconciliation Act of 2010, H.R. 4872, signed into law March 23, advisors as well as the financial services community at large now have the task of digesting the law's details and deciphering how it will affect their businesses--and the lives of their clients--going forward.

While the healthcare reform law will be phased in over the next decade, it will continue to impact the economy for many years to come. The Congressional Budget Office (CBO) has weighed in with its assessment of how much healthcare reform will cost (see Numerology), with CBO Director Douglas Elmendorf stating in April that over a 10-year period, ending in 2019, the law's new insurance provisions would reduce the deficit by $143 billion and cover 32 million people who didn't have insurance.

For advisors, healthcare reform affects a myriad of issues--namely taxes, investing, annuities, health savings accounts (HSAs), flexible spending accounts, as well as implications for small businesses--that will keep them on their toes for some time. Most of these topics are discussed in the pages that follow.

For instance, come 2011, the healthcare law conforms the definition of qualified medical expenses for health savings, health flexible spending accounts, and health reimbursement arrangements to the definition used for the itemized deduction. Also in 2011, the healthcare reform law increases the penalty for distributions from health savings accounts prior to age 65 not used for qualified medical expenses from 10% to 20%.

In 2013, the law increases the Medicare payroll tax from 1.45% to 2.35% for individuals with wages of more than $200,000 and $250,000 for joint filers. The law also imposes a new 3.8% tax on investment income referred to as "unearned income" for individuals with wages of more than $200,000 and $250,000 for joint filers.

The National Association for Fixed Annuities (NAFA) opposes the 3.8% tax on investment income, noting in a recent letter to Senator Harry Reid (D-Nevada) that "the 3.8% Medicare contribution on income received from individual annuities would serve as a disincentive to save in a product that uniquely allows an individual to accumulate retirement savings and to guarantee that savings can never be outlived."

NAFA said in the letter to Reid that it questions the inclusion of annuity income in the healthcare reform bill "since the Administration's Middle Class Task Force clearly recognizes the value of guaranteed lifetime income." Kim O'Brien, executive director of NAFA, says her group is joining forces with other groups representing annuities to continue "to work to remove [the 3.8% tax on investment income] before its effective date."

For an annuity, O'Brien says, there are many questions on how investment income "is going to be measured, and the devil will be in the details of how the IRS interprets the law and sets up the administrative rules for the law." Right now as we read the law, she continues, "any distribution for an annuity, if your AGI (adjustable gross income) is over $200,000 for a single filer or $250,000 for a joint filer, will be subject to this additional [3.8%] tax."

This tax on investment income "will hit many small business owners whose businesses are not incorporated," O'Brien says, adding that the tax credits currently avialable to small businesses aren't enough to make up for the 3.8% tax hike. As mentioned, the 3.8% tax is in conflict with President Obama's Middle Class Task Force and its promotion of income annuities, she says, also pointing to Treasury and the Department of Labor's request for information on the benefits of lifetime annuities in defined contribution plans. O'Brien adds that the 3.8% tax does not include qualified plans.